Mutual Fund News

Glamour gone for fund managers

By ERIC REGULY

Tuesday, April 15, 2003

There was a time when young Canadian men and women, in their ploddingly Canadian ways, wanted to become fund managers upon release from MBA school. In the 1980s and 1990s, the cult of equity had gripped the nation. Mutual funds were all the rage and no one cared about extortionate management expense ratio (MER) fees and other costs.

Managing a fund -- any fund, any size, anywhere -- was one of Bay Street's glam jobs. Fund managers got newspaper columns, promoted themselves on TV and got paid like they knew what they were doing.

Now, managing a fund is about as much fun as a SARS clinic, and it's not just because fund returns have been abysmal and investors are cashing out (though that has certainly helped). It's also because Canadian capitalism isn't throwing out a lot of compelling opportunities any more. Corporate consolidation, failures, restructurings and general flat-lining have turned the upper ranks of the TSX into a shambles.

The few big, healthy names on the list, meanwhile, are hardly worth buying because their stories are well known and repeated ad nauseum, while their performance has been goosed by the lack of buying opportunities elsewhere. Funds have to buy; they can't sit on cash even if it were sensible thing to do.

Since November or so, the main TSX index has been stuck near 6,500, give or take a couple of hundred points.

Even the American stroll through Baghdad failed to give the market a lift.

The lack of direction can be partly explained by the suspicion that the U.S. economy will get worse before it gets better, and partly because so many high fliers were hit with Daisy Cutter bombs.

Let's take a walking tour. Nortel was last year's story, of course, and the company, in its truncated form, may yet be saved. But since the beginning of the year, the stock has been stuck somewhat short of $3.50. So much for that comeback story.

Bombardier, in spite of the recruitment of CEO Paul Tellier, the man who turned bloated and bureaucratic CN Rail into a top-tier, NAFTA-inspired transportation company, will be much harder to fix.

Given the turmoil in the aerospace market, buying the stock would be akin to Russian roulette.

Celestica's plants are turning into echo chambers. Quebecor and Quebecor World are ailing. Air Canada is in bankruptcy protection. Telus's recovery has been fully discounted, as has BCE's continuing evolution back into a phone company.

A flurry of takeovers since 2000 has thinned out the big energy names and the survivors, such as EnCana, may soon get battered by falling oil prices. True, the index is home to some terrific names -- big, liquid, profitable, sector-leading stocks -- but finding hidden value among them is a doomed exercise. Take the banks and the insurers. Royal Bank, a bank that borders on irrelevancy by global standards, is covered by more than a dozen equity analysts, most of whom mill out predictable research reports like cheap Harlequins.

The fact is, nothing much changes at these juggernauts from one quarter to another. What's more, the trading in the bank and insurance stocks is highly efficient. Investors instantly discount shifts in potential value, however subtle. That's not to say fund managers can't make money off the financial services names; it's just almost impossible to get ahead of the herd.

So how do fund managers play the game? Most will claim they use a bottom-up approach, that is, they hunt out and buy value. Between the destroyed and overvalued names, though, that's a daunting exercise. So they turn into closet top-down managers, where they buy the best names in the sector and gamble that exterior forces, such as falling interest rates or rising commodity prices, will take them to the promised land.

Or, even more dangerously, they will go madly off in all directions looking for value -- or sheer dumb luck -- in lesser names. How else to explain, for instance, the periodic buying spasms at ATI Technologies? The roller-coaster ride suggests Bay Street is stuffed with bored fund managers.

The joke on Bay Street is that funds perform best when their managers are on holiday, when they are more concerned about their golf games than with portfolio fiddling. One fund manager says the slim pickings on the TSX means that "most big-cap managers can do their jobs two days a week," while it is common knowledge that others are prone to exceedingly long lunches, often followed by a matinee.

Funds are consolidating to reduce costs. Fund managers will lose their jobs. The era of the glam, big-cap fund manager is probably over.

Given the shoddy returns in the past couple of years, this won't break the heart of most investors. But, to be fair, the implosion of so many names on the TSX, coupled with takeover flurry that eliminated so many others, meant that the market itself gave them the final push.